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Capacity constraints, asymmetries, and the business cycle

Author

Listed:
  • Gary D. Hansen

    (University of California, Los Angeles)

  • Edward C. Prescott

    (Arizona State University)

Abstract

We study how an occasionally binding capacity constraint affects the properties of business cycles. A real business cycle model is constructed where production takes place at individual plants and the number of plants operated varies over the cycle. The capacity constraint binds in states where all plants are operated. We derive the aggregate production function for this economy, which turns out to differ from the standard Cobb.Douglas function while retaining its desirable properties. The business cycle features of this one-sector growth model are similar to those of a standard real business cycle model in most respects. Our model does, however, display some properties of actual economies that standard models do not. In particular, business cycles in our model are asymmetric--troughs are deeper on average than peaks are tall. Also, labor's share of income is counter-cyclical, as it is in US data. (Copyright: Elsevier)

Suggested Citation

  • Gary D. Hansen & Edward C. Prescott, 2005. "Capacity constraints, asymmetries, and the business cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(4), pages 850-865, October.
    • Handle: RePEc:red:issued:v:8:y:2005:i:4:p:850-865
    DOI: 10.1016/j.red.2005.08.001
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Capacity utilization; Asymmetric business cycles; Real business cycles;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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